Uncertainty

1. Psychology of Personal Decision-Making Uncertainty

2. Pascal “It is not certain that everything is uncertain”

3. Agenda • Uncertainty!

4. A perplexing thought? “If we can’t be certain about future consequences of alternatives, how can we be confident we choose best?”

5. What to do? • Uncertainty Proof Our Alternatives! • Robust • Assumes little about predicting the future • Non Quantitative • Strategies like diversification and risk sharing • Sensitivity Analysis • Maximize EV (later)

6. Uncertainty Awareness • We tend to be overly confident in our beliefs • Requires effort to doubt ourselves • We rely on what we know to predict the future • There are problems with this • What’s the risk in the status quo? • Rarely ask ourselves that! • SQ is usually perceived as less risky • Flemings on Kitchen Nightmares <pic>

7. Purchasing Power and Inflation Risk • Bonds are worth a specified number of dollars in the future • People think of them as “safer” or “less risky” • Stock prices can adjust for inflation – especially internationally • “Risk-free” bonds could be riskier than stocks!

8. Woeful examples of the future not being like the past • Home prices, mortgage nonsense and subsequent bubble • People building in flood plains • TAKE AWAY: Anticipating uncertainty is an important part of structuring decision opportunities • Requires creative thought • Stimulus variation

9. Stimulus Variation for Uncertainty • Look at your fact table • What entries are you most uncertain about? • Look at your 1-10 table • What entries are you most uncertain about? • Look at your alternatives • Which alternative is the biggest gamble? • What could go wrong? • What could go right?

10. Stimulus Variation for Alternatives cont’d • Royal Dutch Shell • Put bounds on the future • Might wish to share process with Exxon and BP! • Think of best and worst outcomes • #1 Put best in one scenario • #2 Put all worse in another • #3 Derive plausible scenarios from combinations • #4 Imagine how stakeholder(s) would respond in those situations and PLAN • Makes the improbable vivid, if not more probable

11. What this section is all about… • How to think better about multiple futures

12. Why we think in terms of a single future • Reliance on mental habits (status quo) • Limited processing capacity • Defensive avoidance (motivational) • Warning signs: • Excessive emotionality • Unwillingness to think through alternatives • Countermeasures: • Realistic hope we can deal with uncertainty • Emotional distance from the problem • Process orientation

13. Regret

14. Regret • After the decision has been made and the future has arrived! • Intensity of regret increases with the severity of the loss (Bell, 1982) • Consequence of poor judgment not at decision point, yet at the time you’re feeling it!

15. We’re goofy like this: • Looking forward we experience less uncertainty than we should • Looking backward we experience even less uncertainty than when looking forward

16. Hindsight Bias • Belief the way things actually turned out was easy to foresee • Countermeasures • Remind yourself of what you knew at the time of decision (therapy) • Prepare yourself to live with the worst scenario (inoculation) • Also prepare to remind yourself what was known (therapy preparation)

17. Principles of Uncertainty Proofing • Control • Obtaining information • Keeping options open • Diversifying • Sharing Risk

18. Control • Increase probabilities of desirable outcomes: • Seeding rain clouds to sell umbrellas • Test runs – travel relationships • Joining organizations/activities to get a mate • Start the search early and let a lot of people know to get a job • When using control, account for • Time, money, risk to personal feelings

19. Obtaining Information • Waiting • ADVANTAGES: Costs tend to be lower • DISADVANTAGES: Procrastination, other windows of opportunities can close • WEIGH: Benefits of waiting against the costs of waiting • Seeking: some associated cost • Looking, asking advice, research, or trying things out (retirement couple) • Ask yourself: “When would be the best time to make this decision?”

20. Keeping options open • AKA “Contingency planning” • Have a fallback plan • Ask: “What do I do if this doesn’t work?” • Have resource reserves: people, money, time • Consider when these values appear in your table to weight them more!

21. Keeping options open • Seek reversible alternatives • Don’t burn bridges! • SPR, CPF, and CP… and 1bog

22. Diversify • If you like risky investments, consider making 20 of them instead of 1 • Can think of diversification outside of $! • Emotional diversity • Network of friends • Spousal death

23. Risk Sharing • If in a leadership position, share decision making process • + organizational justice perceptions • + retention, affective org. commitment, and OCBs

24. Sensitivity Analysis • “If a difference makes no difference, don’t give it any more thought!”

25. Sensitivity Analysis • How does new car react to the way you normally drive? • For decisions: • Tests your model against your intuition and allows you to trust it more • Like flexing out a rental car • Guides your future work on the decision • Don’t think about aspects of decisions which don’t matter!

26. Sensitivity Analysis • Procedure: • Identify one or more columns with high importance weights • Identify 2 or more rows with high total values • Focus on the cells with at the intersections which you’re uncertain • Tweak changes in direction that can change your decision • Think of values and events that could change your decision